Archive for May, 2021

• Morning News: May 5, 2021
  Eddy Elfenbein, May 5th, 2021 at 6:58 am

  As Cars Go Electric, China Builds a Big Lead in Factories

  Can the Biden Agenda Fix Middle America’s Deepest Problem?

  Facing Chips Shortage, Biden May Shelve Blunt Tool Used in COVID Fight

  U.S. Chip Startups, Long Shunned in Favor of Internet Bets, Stir Excitement Again

  Biden’s Fed Choices Add Uncertainty for Inflation-Wary Investors

  U.S. Births Drop to the Lowest Level Since the 1970s

  Dogecoin, ‘The Most Honest Sh*tcoin,’ Has Remarkably Strong Fundamentals, Concludes Galaxy Digital Research

  Pfizer Reaps Hundreds of Millions in Profits From Covid Vaccine

  Bill and Melinda Gates’ Other Partnership Is Too Big To Fail

  The Untold Story of How Jeff Bezos Beat the Tabloids

  Snapchat Can Be Sued For Role In Fatal Car Crash, Court Rules

  Nick Maggiulli: Two Bets for the Next Decade

  Ben Carlson: When Does It Make Sense to Take Profits From Your Biggest Winners?

  Joshua Brown: Sorry Not Sorry

  Howard Lindzon: The New Builders

  Michael Batnick: The Biggest Threat to Tech

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• CWS Market Review – May 4, 2021
  Eddy Elfenbein, May 4th, 2021 at 7:52 pm

  (This is the free version of CWS Market Review. Don’t forget to sign up for the premium newsletter for $20 per month or $200 for the whole year. Thanks for your support.)

  The Best Earnings Season Ever!

  The Q1 earnings season is shaping up to be an outstanding earnings season for Corporate America.

  The Wall Street Journal notes that this season’s “beat rate,” meaning how many companies are reporting results above Wall Street’s consensus, is running at 87%. That’s the highest since they started tracking these numbers in 1994. The long-term average is 65%.

  

  Side note: That last stat says a lot about how Wall Street thinks. You’re expected to beat expectations. You’ll notice how often companies that merely meet expectations see their share prices drop. As I like to say, when they meet expectations, no one sees it coming. When in doubt, the market’s reaction is the real judge.

  Once, when I was just getting started in this business, I was reading a particularly confusing earnings report. I asked one of the old-timers if the company had beaten or missed expectations. He said, “I’ll let you know at 9:31,” referring to just after trading started.

  Not only are companies beating the Street, but they’re doing it by a lot. Historically, the average earnings beat has been 3.6%. This season, the average beat is 22.8%. This looks to be Wall Street’s best earnings growth in more than 10 years. Of course, that’s really due to throttling the economy a year ago and then letting go. Plus, the stimulus checks are helping out. I’ll have more on that in a bit.

  I’m pleased to report that our Buy List is doing better than the rest of the market. Through Tuesday, 14 of of 15 Buy List stocks have beaten expectations. Some have beaten by a lot. Both Danaher (DHR) and Moody’s (MCO) beat expectations by 44%. Sherwin-Williams (SHW) beat by 25% and Stepan beat by 27%. Lots of our stocks are responding well. We had new highs today from AFLAC (AFL), Broadridge Financial Solutions (BR), Hershey (HSY), Sherwin-Williams (SHW) and Stepan (SCL).

  There’s still an important rotation unfolding. Tuesday was the sixth day in a row that the NASDAQ trailed the S&P 500. This looks to be the continuation of a trend that started in mid-February but had stalled out somewhat by March. Now it’s moving again. The simple fact is that a lot of the tech sector is too expensive.

  (Did I mention I have a premium newsletter where I go into more detail on our portfolio? OK, good.)

  What to Do With All This Cash?

  One of the interesting side effects of the pandemic is that companies are now flush with cash. As the economy started to lock down a year ago, many companies rushed to borrow money to ride out the storm.

  So now we’re at a crossroad. With rates so low, there’s no rush to pay off that debt. That’s leading more companies to raise dividends or expand buybacks. The other choice is that more companies are willing to use that cash to make acquisitions.

  From Bloomberg:

  Total debt loads for U.S. companies outside the financial industry rose 10% in 2020 to $11.1 trillion, according to the Federal Reserve, in part because lower interest rates have made it less burdensome for many companies to shoulder more debt. So far, corporations have largely been hoarding the money rather than spending it. Non-financial companies in the S&P 500 index that reported results before March 31 had about $2.13 trillion of cash and marketable securities on their books in the most recent quarter, up more than 25% from a year earlier, according to data compiled by Bloomberg.

  Personally, I get a little nervous when companies have too much cash. They’re liable to do something with too little forethought. Peter Lynch referred to this as the Bladder Theory of Corporate Finance. Recently there were rumors that FactSet, one of our stocks, might be bought out. I expect to see more acquisitions.

  This leads us to the Federal Reserve. Chairman Jerome Powell has made it clear that the Fed has no plans to raise rates anytime soon. The Fed moved early and aggressively. Investors have gotten used to the idea that we’re going to see more inflation sometime soon. FactSet reported that inflation is being mentioned in more earnings calls than at any point in the last 10 years.

  In addition to lower interest rates, the Fed has also had a massive bond-buying program. Each month, the Fed buys $80 billion in Treasuries and $40 billion in mortgage-backed securities. Now more economists on Wall Street believe that the Fed will announce a tapering of these purchases before the end of the year. This is a noticeable change compared with a few months ago. It may be related to more fiscal stimulus from Washington. One possible unveiling forum could be in late August at the Fed’s annual conference in Jackson Hole, Wyoming.

  For now, I would say that I’m slightly but not strongly in the doubter camp. I’m inclined to believe that the Fed will keep buying as many bonds as it can. The key is to watch for any incipient signs of inflation.

  Here’s a look at the 10-year breakevens, which is the market’s take on inflation for the next 10 years.

  

  Household finances are also on the mend. This week we learned that household spending rose by 21.2% in March. That’s an all-time record. We have the stimulus checks to thank. Check out this stat: The stimmies made up $3.948 trillion of the total $4.213 trillion rise in personal income during March.

  The most recent Case-Shiller Index showed that home prices are rising at the fastest rate in 15 years. In the 12 months ending in January, U.S. home prices increased by 11.2%. Lowe’s said it’s going to hire 50,000 workers. Trex (TREX) is up 29% for us this year. That’s after gaining 86% last year.

  This boom is distorting the entire market. The number of buyers has far outpaced the number of sellers. As a result, the supply of homes is at a record low. In February, the number of homes for sale was down 30% from last February. The housing boom has actually led to a shortage of chlorine. The difference this time is that the banking system is far more resilient than it was 15 years ago.

  Stock Feature: Simulations Plus (SLP)

  Here’s another example of a neat company that’s not well known. Simulations Plus (SLP) is a small company that I’m a big fan of. Not many people know about this one. The market cap is just over $1 billion and only three analysts follow it. Unfortunately, the stock price is very high. Too high in fact, but it’s certainly one to keep an eye on. Simulations Plus makes software that lets drug companies simulate tests of their products in the virtual world before using any human or animal test subjects.

  That’s a big cost-saver for drug companies. Simulations Plus helps streamline the R&D process by making it faster and more efficient. Not only is this cost effective, but it also helps drug companies in dealing with time-consuming regulatory hurdles.

  In fact, there are times when the results from SLP’s products have allowed companies to waive clinical studies. The cost savings are substantial. This means drug companies don’t have to deal with the time and expense of recruiting test subjects and analyzing test results.

  By using SLP’s software, drug companies can experiment with many variables like fine tuning dosage amounts. Companies can also see potential harmful side effects. Another important factor is that companies can identify treatments that have no benefits.

  In healthcare, cost control is a major issue. That’s why SLP’s products are in such heavy demand. A great business to buy is one that helps other companies control their costs.

  In many ways, I think what Simulations Plus does for pharmaceutical researchers is closely akin to what Ansys (ANSS) does for engineers. By sitting at a computer, an employee can efficiently iron out a lot of kinks before experimenting in the real world. Simulations Plus is also branching out from their core customer base of drug companies. They work with consumer products companies to see the side effect of things like pesticides.

  There’s good news lately! The stock has been getting beaten up. (I love when companies I like but don’t own get dinged by the market.) Today was SLP’s seventh daily decline in a row. The last two earnings reports were fine, but nothing great. SLP beat by one penny per share each time. In February, SLP got above $90 per share. Lately, it’s around $57.50 per share.

  

  The financial numbers are very impressive. Over the last ten years, Simulations Plus has maintained organic growth of 12% to 14%. Impressively, they’ve done this without carrying much debt. Sales growth is strong, 27% last quarter. Gross margins are running at 78%.

  The problem is price. Ballpark guess, SLP should earn about 55 cents per share this fiscal year and 65 cents per share next year. That means the stock is going for something like 87 times next year’s earnings. That’s way too high.

  Simulations Plus currently pays out a quarterly dividend of six cents per share. That’s not that much but it’s a sign of confidence from management. The company has consistently paid out a dividend for the last nine years. While SLP is too rich for me, if the stock ever drops below $40, it could be a very good buy.

  That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

  – Eddy

  P.S. Don’t forget to sign up for our premium newsletter.

  P.P.S. And support the ETF!

• Why I Like Disney
  Eddy Elfenbein, May 4th, 2021 at 8:58 am

  I saw this posted by Josh Brown. This is basically a three-minute clip explaining why I’m such a fan of Disney’s business.

• Broadridge Earns $1.76 per Share
  Eddy Elfenbein, May 4th, 2021 at 7:22 am

  This morning, Broadridge Financial Solutions (BR) released a very good earnings report and the company increased its guidance. The company reported fiscal Q3 earnings of $1.76 per share. That beat Wall Street’s consensus by eight cents per share. Both operating income and recurring revenue grew by 8%.

  “Broadridge delivered strong third quarter results, including 8% recurring revenue growth and 8% Adjusted Operating income growth,” said Tim Gokey, Broadridge’s Chief Executive Officer.

  “Our results continue to be propelled by powerful long-term trends including increased digitization, mutualization, and the democratization of investing. As a result, we continue to invest in our products and technology platforms. These investments, along with the pending acquisition of Itiviti, will further strengthen our ability to drive increased value to our clients and growth to our shareholders,” Mr. Gokey continued.

  The best news is that Broadridge raised its 2021 guidance. Previously the company saw recurring revenue growth coming in the top end of its 3% to 5% range. Now Broadridge sees recurring revenue growth of 8% to 10%.

  For total revenue, the company had previously projected the higher end of its 1% to 4% range. Broadridge also sees total revenue growth of 8% to 10%.

  On the earnings call, Broadridge said it sees earnings growth for this year of 11% to 13%. The previous guidance was 6% to 10%. Since BR made $5.03 per share last year, the old guidance implied earnings of $5.43 to $5.53 per share for this year. Going by the new range, BR expects earnings of $5.58 to $5.68 per share.

  The company has already made $3.47 per share for the first three quarters of this fiscal year, so the new guidance implies fiscal Q4 (June) earnings of $2.11 to $2.21 per share. Wall Street had been expecting $2.13 per share.

• Morning News: May 4, 2021
  Eddy Elfenbein, May 4th, 2021 at 7:02 am

  ‘We Cannot Wait Until June’: Greece’s Reopening Gamble

  The Booming U.S. Recovery Is Leaving Some Communities Completely Behind

  Biden Tax Rule Would Rip Billions From Biggest Fortunes at Death

  Is It Over Yet? Still No Recession End Date as U.S. Economy Hums Along

  Rotation Out of Megacaps Drags Nasdaq Futures Lower

  Infineon Expects 2.5 Million ‘Lost Cars’ Due to Chip Shortage

  Oil Giant Saudi Aramco Beats Estimates with 30% Hike in First-Quarter Profit

  Buffett’s ESG Snub Risks Alienating Wall Street

  The Big Stakes in the Gates Divorce

  Jeweler Pandora Takes Ethical Stand Against Mined Diamonds

  Eleven Madison Park, One of the World’s Best Restaurants, Is Going Vegan

  Mr. Beast, YouTube Star, Wants to Take Over the Business World

  Ben Carlson: The Difference Between Managing Money and Managing Investors

  Joshua Brown: Disney’s Not Playing Games

  Howard Lindzon: Momentum Monday: Much Ado About Inflation

  Jeff Carter: Questions on Exchanges & Crying About Competition

  Be sure to follow me on Twitter.

• April ISM Disappoints
  Eddy Elfenbein, May 3rd, 2021 at 10:23 am

  April is on the books and the S&P 500 gained 5.24% last month. With dividends, the index was up 5.34%. That’s the third monthly gain in a row, and 10th of the last 13.

  

  This is the first week of the month and that means we get several important economic reports, concluding on Friday with the jobs report. This morning, the ISM Manufacturing came in at 60.7. That’s a good number but it was below expectations of 65.

  Construction spending rose by 0.2%. Wall Street had been expecting 1.8%. The stock market is up so far this morning and it’s not far from a fresh all-time high.

  This is an outstanding earnings season. Right now, 87% of companies are beating expectations. That’s the highest ever recorded since they started keeping track in 1994. The historical average is 65%. (That’s right, you’re expected to beat expectations.)

  Going back to 1994, companies have beat earnings estimates by an average of 3.6%, according to Refinitiv. But this earnings season, companies have posted profits that have been 22.8% above expectations.

• Morning News: May 3, 2021
  Eddy Elfenbein, May 3rd, 2021 at 7:09 am

  Ethereum Breaks Past $3,000 to Quadruple in Value in 2021

  U.S. Household Income Surged by Record 21.1% in March

  Biden’s Proposals Aim to Give Sturdier Support to the Middle Class

  Biden’s Tax-and-Spend Plans Are Big, But Wealth Gaps Are Bigger

  Fourth Stimulus Check? Billionaires’ Pandemic Profits Could Easily Fund Two More Payments

  Albuquerque Is Winning the Streaming Wars

  Verizon Near Deal to Sell Yahoo and AOL

  Dell Reaches Deal to Sell Boomi to TPG, Francisco Partners

  Tesla, Under Scrutiny in China, Steps Up Engagement With Regulators

  Berkshire Hathaway Faces Headwinds As Shareholders Look To Its Future

  Warren Buffett Says Greg Abel Is Likely Successor at Berkshire

  Has Online Retail’s Biggest Bully Returned?

  LSD, Cargo Shorts and the Fall of a High-Flying Tech CEO

  Ben Carlson: Owning a Car vs. Leasing a Car & The U.S. Stock Market SHOULD Be In a Bubble

  Michael Batnick: Animal Spirits: The Sports Memorabilia Boom & They Said What?

  Howard Lindzon: Smart People With Bad Takes…Bitcoin, Robinhood and Price Pays

  Be sure to follow me on Twitter.

• Sherwin-Williams as Inflation Hedge
  Eddy Elfenbein, May 1st, 2021 at 5:05 pm

  From Barron’s:

  Either way, prices are going higher—and Sherwin-Williams (SHW) should benefit. The paint manufacturer’s stock was little changed this past week after reporting a profit of $2.06 a share, well above forecasts for $1.64, on sales of $4.66 billion, topping expectations for $4.51 billion. But it was its comments on pricing that really caught investors’ attention.

  “Our previously announced 3% to 4% price increase to U.S. and Canadian customers became effective Feb. 1, before the supply-chain disruption the industry began experiencing later in the quarter,” Sherwin-Williams CEO John George Morikis said on the company’s conference call this past Tuesday. “We likely will need to take further pricing actions if raw material costs remain at these elevated levels.”

  Baird analyst Ghansham Panjabi, who rates Sherwin-Williams a Buy, notes that it is likely waiting to see just how much its costs rise so it doesn’t have to raise prices more than once more this year. If the company can raise prices without hurting sales, it can keep growing its profit margin even as input prices rise. Panjabi raised his price target on the stock to $300, up about 10% from Friday’s close of $273.87, calling it “the ultimate hedge toward inflation.”